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Agencies encourage financial institutions to explore innovative industry approaches to BSA/AML compliance
On December 3, the Financial Crimes Enforcement Network (FinCEN) released a joint statement along with federal banking agencies—the Federal Reserve Board, FDIC, NCUA, and OCC (together, the “agencies”)—to encourage banks and credit unions to explore innovative approaches such as artificial intelligence, digital identity technologies, and internal financial intelligence units to combat money laundering, terrorist financing, and other illicit financial threats when safeguarding the financial system. According to the agencies, private sector innovation and the adoption of new technologies can enhance the effectiveness and efficiency of Bank Secrecy Act/anti-money laundering (BSA/AML) compliance programs. Moreover, new innovations and technologies can also enhance transaction monitoring systems. Specifically, the agencies urged banks to test innovative programs to explore the use of artificial intelligence. However, the agencies emphasized that while feedback on innovative programs may be provided, the “pilot programs in and of themselves should not subject banks to supervisory criticism even if the pilot programs ultimately prove unsuccessful. Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action with respect to that program.” The joint statement further specifies that the agencies will be willing to grant exceptive relief from BSA regulatory requirements to facilitate pilot programs, “provided that banks maintain the overall effectiveness of their BSA/AML compliance programs.” However, banks that maintain effective compliance programs but choose not to innovate will not be penalized or criticized.
According to Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker, “[a]s money launderers and other illicit actors constantly evolve their tactics, we want the compliance community to likewise adapt their efforts to counter these threats,” pointing to the recent use of innovative technologies to identify and report illicit financial activity related to both Iran and North Korea.
As previously covered by InfoBytes, earlier in October the agencies provided guidance on resource sharing between banks and credit unions in order to more efficiently and effectively manage their BSA/AML obligations.
On November 30, the U.S. District Court for the Southern District of New York agreed to stay proceedings covering an investment company’s challenge to a bank’s practice of billing the legal fees incurred in defending a residential mortgage-backed securities (RMBS) trusts lawsuit to the RMBS trusts. According to the opinion, in 2014, an investment company filed a lawsuit against the national bank alleging breach of contract and other common law duties in the bank’s role as trustee for multiple RMBS trusts. In 2017, the investment company filed a separate lawsuit in the same court, challenging the bank’s practice of billing the RMBS trusts for the legal fees incurred by defending the original lawsuit. The two lawsuits were consolidated and the bank moved to dismiss the second lawsuit or stay the proceedings during the pendency of the original lawsuit. Upon review, the court agreed to stay the proceedings, noting the “claims at issue in the fees complaint may well turn on determinations made in the underlying suit.” The investment company argued that while the trusts’ agreements contain fee indemnity clauses, the clauses are not applicable to the bank’s alleged “willful misfeasance, bad faith, or gross negligence.” The court noted that whether the bank acted grossly negligent in its duties as trustee for the RMBS trusts is a “central factual question” in the original lawsuit and therefore, staying the proceedings “could avoid a possible waste of both the parties’ and the court’s resources.”
Additionally, in the same order, the court denied NCUA’s request to intervene in the fees action, holding the agency did not establish it could meet the higher burden of demonstrating inadequate representation by the investment company, which shares the same interests as NCUA.
On November 27, the Federal Financial Institutions Examination Council (FFIEC) issued the second update on the status of its Examination Modernization Project. The project’s objective is to identify and assess measures to improve the community bank safety and soundness examination process, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act’s review of regulations. As previously covered by InfoBytes, in March, the FFIEC released the first update, which identified four areas with potential for the most “meaningful supervisory burden reduction.” The second update focuses on tailoring examination plans and procedures based on risk in order to reduce burden. Specifically, after a review of risk-based procedures and processes, the Federal Reserve Board, the FDIC, the NCUA, the OCC, and the State Liaison Committee have committed to issue reinforcing and clarifying examiner guidance to their examination staffs on risk-focused examination principles for community financial institutions, if necessary. The guidance covers, among other things, the following practices (i) consideration of the unique risk profile, complexity, and business model of the institution when developing the exam plan; (ii) tailoring of the document request list based on the financial institution’s business model, complexity, risk profile and planned scope of review; and (iii) applying examination procedures in a way that reduces the level of review of low risk institutions or low risk areas.
The FFIEC noted it may take further action to improve the examination process as the project progresses.
Federal, state financial regulatory agencies issue guidance for institutions affected by California wildfires; FinCEN encourages financial institutions to communicate BSA filing delays
On November 19, the Financial Crimes Enforcement Network (FinCEN) issued a notice to financial institutions that file Bank Secrecy Act reports encouraging such institutions to communicate with FinCEN and their functional regulators regarding any expected filing delays caused by the California wildfires. FinCEN also reminded financial institutions to review advisory FIN-2017-A007, previously covered by InfoBytes, which discusses potential fraudulent activity related to recent disaster relief schemes.
In a related action, the Federal Reserve Board, California Department of Business Oversight, Conference of State Bank Supervisors, FDIC, NCUA, and OCC (collectively, the “agencies”) issued a joint statement on November 15 providing guidance to financial institutions impacted by the California wildfires. The agencies encouraged lenders to work with borrowers in impacted communities to modify loans as appropriate based on the facts and circumstances of each borrower and loan. In addition, the agencies assured lenders that they would (i) expedite any request to operate temporary facilities to provide more convenient services to those affected by the wildfires; (ii) not generally assess penalties for institutions that take prudent steps to satisfy any publishing or reporting requirements, including by contacting their state or federal regulator to discuss satisfaction of such requirements; and (iii) consider granting institutions favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.
Find continuing InfoBytes coverage on disaster relief here.
On October 3, the Financial Crimes Enforcement Network, Federal Reserve Board, FDIC, NCUA, and OCC (together, the agencies) issued an interagency statement outlining instances where banks and credit unions may choose to enter into collaborative arrangements to share resources in order to more efficiently and effectively manage their Bank Secrecy Act (BSA) and anti-money laundering (AML) obligations. The statement noted that collaborative arrangements are most suitable for “banks with a community focus, less complex operations, and lower-risk profiles for money laundering or terrorist financing.” The agencies described several examples in which collaboration between banks may be beneficial, such as (i) conducting internal control functions, including reviewing and drafting BSA/AML policies and procedures and risk-based customer identification and account monitoring processes; (ii) sharing resources for BSA/AML independent testing; and (iii) conducting BSA/AML training on regulatory requirements and internal policies, procedures, and processes. Other potential benefits include cost reductions, increases in operational efficiencies, and the availability to leverage specialized expertise.
However, the agencies cautioned that banks who choose to enter into collaborative agreements should carefully consider the associated risks “in relation to the bank’s risk profile, adequate documentation, consideration of legal restrictions, and the establishment of appropriate oversight mechanisms.” Moreover, banks should ensure that the collaborative arrangement is consistent with sound principles of corporate governance, have in place a contractual agreement, conduct periodic performance reviews, and consult their regulator’s guidance concerning third-party relationship to ensure compliance. The agencies further noted that “each bank is responsible for ensuring compliance with BSA requirements. Sharing resources in no way relieves a bank of this responsibility.” The interagency statement emphasizes that it is not applicable “to collaborative arrangements or consortia formed for the purpose of sharing information under Section 314(b) of the USA PATRIOT Act,” and “banks that form collaborative arrangements as described in this interagency statement are not an association for purposes of Section 314(b) of the USA PATRIOT Act.”
FinCEN, federal banking agencies provide exemption from customer identification program requirements for premium finance loans
On September 27, the Financial Crimes Enforcement Network (FinCEN), Federal Reserve Board, FDIC, NCUA, and OCC (together, the agencies) collectively issued an interagency order announcing an exemption from the requirements of the customer identification program (CIP) rules for premium finance loans extended by banks to commercial customers. The exemption, which is effective immediately, will facilitate short-term financing to business to aid in the purchase of property and casualty insurance policies. The order states that FinCEN believes these types of loans present a low risk for money laundering due to the “purpose for which the loans are extended and the limitations on the ability of a customer to use such funds for any other purpose.” However, banks engaged in premium finance lending are still required to comply with all other regulatory requirements implementing the Bank Secrecy Act (BSA), including filing suspicious activity reports. The federal banking agencies further determined that the order granting this exemption is consistent with both the purposes of the BSA and safe and sound banking practices. (See also Federal Reserve Board SR 18-6, FDIC FIL-52-2018, and OCC Bulletin 2018-35.)
Federal and state financial regulatory agencies issue interagency disaster relief guidance for institutions affected by Hurricane Florence
On September 14, the OCC, Federal Reserve Board, FDIC, NCUA, and the Conference of State Bank Supervisors (collectively, the “agencies”) issued a joint statement providing guidance to financial institutions impacted by Hurricane Florence. The agencies encouraged lenders to work with borrowers in impacted communities and to consider, among other things, (i) whether to modify loans based on the facts and circumstances, and (ii) requesting to operate temporary bank facilities if faced with operational difficulties. On the same day, the FDIC also provided guidance for depository institutions assisting affected customers (see FIL-48-2018), which may include “waiving fees, increasing ATM cash limits, easing credit card limits, allowing loan customers to defer or skip payments, and delaying the submission of delinquency notices to credit bureaus.” Furthermore, the FDIC encouraged depository institutions to use Bank Secrecy Act-permitted “non-documentary verification methods” for customers unable to provide standard identification documents.
The agencies also reminded institutions to contact their appropriate federal and/or state regulator should they experience disaster-related difficulties when complying with publishing and regulatory reporting requirements, and further noted that institutions may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery. The statement also provides links to previously issued examiner guidance for institutions affected by major disasters.
Find continuing InfoBytes coverage on disaster relief here.
On September 11, five federal agencies (the Federal Reserve Board, CFPB, FDIC, NCUA, and OCC) issued a joint statement confirming that supervisory guidance “does not have the force and effect of law, and [that] the agencies do not take enforcement actions based on supervisory guidance.” The statement distinguishes the various types of supervisory guidance—interagency statements, advisories, bulletins, policy statements, questions and answers, and frequently asked questions—from laws or regulations and emphasizes that the intention of supervisory guidance is to outline agencies’ expectations or priorities. The statement highlights five policies and practices related to supervisory guidance: (i) limit the use of numerical thresholds or other “bright-line” requirements; (ii) examiners will not cite to “violations” of supervisory guidance; (iii) request for public comment does not mean the guidance has the force and effect of law; (iv) limit multiple issuances of guidance on the same topic; and (v) continue to emphasize the role of supervisory guidance to examiners and to supervised institutions.
On June 4, the National Credit Union Administration (NCUA) published in the Federal Register a proposal to create a new payday alternative loan product (PAL II) in addition to the current payday alternative loan product (PAL I), which has been available since 2010. According to the NCUA announcement, the goal of PAL II is to expand access to safe and affordable short-term, small-dollar loans for consumers of modest means. PAL II would include most features of PAL I, with four changes: (i) eliminating a loan minimum while setting the maximum at $2,000; (ii) setting a term maximum of 12 months; (iii) eliminating the requirement for membership minimum length; and (iv) as long as the consumer only has one outstanding loan at the time, eliminating the time restriction on the number of loans a credit union can make to the borrower in a six month period.
The proposal also requests input on the potential features of a possible third option, PAL III, including lending restrictions, associated fees, and underwriting guidelines.
As previously covered by InfoBytes, the OCC recently issued a bulletin encouraging banks to offer short-term, small dollar installment lending.
On April 25, the National Credit Union Administration (NCUA) issued a final rule in the Federal Register amending its capital planning and stress testing regulations for federally insured credit unions with assets of at least $10 billion after considering comments received following a notice for proposed changes last October. (See previous InfoBytes coverage here.) Among other things, the final rule reduces regulatory burden and improves efficiency by allowing covered credit unions to conduct their own stress tests in accordance with NCUA requirements and report the results in their capital plan submissions. The final rule is effective June 1.
- Daniel P. Stipano to discuss "Lessons learned: Integrating FinCEN’s CDD final rule into compliance programs" during an ACAMS webinar
- Jonice Gray Tucker to discuss "Trends in regulatory enforcement" at the American Bar Association Banking Law Committee Meeting
- Jessica L. Pollet to discuss "Your career is impacting your life..." at the Ark Group Women Legal Conference